Delinquent borrowers who lost their homes in foreclosure moved in next door

Rather than exacerbating a problem with homelessness or creating a mass migration, most people who lost homes in foreclosure stayed in their neighborhoods.

What happened to people who lost their house in foreclosure? Did they end up homeless and destitute? Did they resort to a life of crime or prostitution? Was foreclosure the end of modern civilization as we know it?

People who tried to prevent foreclosures proffered all of these fallacious reasons why we needed to stop foreclosures and give delinquent borrowers principal reductions or free houses. The reality is, most people who lost their homes in foreclosure moved into a nearby rental — and many were financially better off with a lower cost of housing in something they could afford.

One of the houses my fund bought at auction in Las Vegas is still occupied by the former owners. Before they quit making payments, their obligation was for $2,200 per month, and it was due to increase. I bought their house, fixed up the problems from deferred maintenance while they were squatting, and I signed a lease with them for $1,050 per month. That was early 2011, and the former owners are still there. They didn’t have to move, and their cost of housing was cut in half. If they hadn’t defaulted, they would still be paying $2,200 per month in an underwater house, unless they obtained temporary relief from a “permanent” loan modification. I think they are better off as renters.

Most people who lost their homes in foreclosure weren’t fortunate enough to stay in the property, but most moved to a comparable rental nearby. For most it was a practical decision; their children had friends in the neighborhood or school, and most delinquent borrowers still had jobs — contrary to the popular spin, most foreclosures were not caused by job loss but by toxic mortgages. People with jobs stay in the area to keep it; plus, with few jobs created elsewhere, most people had nowhere else to go. As a result, there were no mass migrations associated with the Great Recession.

During the Great Recession, some 10 million Americans, a whopping three percent of the population, were foreclosed, evicted or otherwise booted from their homes. It’s been one of the quickest and most vicious displacements in American history. And where did everyone go?

Most likely, across town.

Sometimes not even that far. Many people didn’t want to leave their school districts or even the neighborhoods they used to live in because they didn’t want to disrupt the lives of their children, and since so many rentals were available because the neighbors experienced the same fate, many rented next door.

… in the Great Recession, there has been no exodus. No masses have streamed across state borders. At the height of the recession, from 2009 to 2010, only about 10.5 million people moved outside their counties, according to the Census Bureau — the lowest proportion since the bureau started tracking the number in 1947.

Instead, the displaced likely moved within their towns and cities. In 2010, the number of local moves increased sharply, to 24.2 million, the highest level in a decade, according to a study by Michael Stoll, professor of public policy at UCLA. Nearly a quarter of them moved for cheaper housing.

I think that’s a poor estimate. Employed renters probably moved for a variety of economic reasons, but those who moved due to foreclosure were all moving for cheaper housing. If they could have afforded their old house, they would have stayed there.

Another reason people stayed close to home is that the recession was so broad. Most regions were hit, and from a job searcher’s perspective, there were few green pastures to be found. During previous downturns, some states, including Florida and Texas, received a huge influx of migrants. Not this time: “There was no good place to move to, and some reason to stay,” Stoll says.

People who were forced to move due to economic hardship often had family, friends, or other support people to assist them where they live; if they moved away from their roots, they’d have no support at all.

Still, people were forced to move. Residents of some cities appeared to be playing a game of musical chairs. In Las Vegas, for instance, one in five residents moved somewhere else in town between 2008 and 2010, says Stoll. And local moves spiked highest in metropolitan areas like Vegas, where unemployment surged and the housing bubble burst. …

“There is little data on what happens to foreclosure migrants. A 2011 study by the Federal Reserve argues, surprisingly, that while foreclosure raises the chances of moving, most postforeclosure migrants don’t end up in “substantially less desirable neighborhoods or more crowded living conditions.”

So much for the sleeping in the street meme.

But the study neglects to take into account other costs. Being foreclosed during a housing crisis means not only losing the equity in your house, but also often entering the rental market right when competition is fierce and prices are skyrocketing. “So at a time when you want to downsize, you end up paying a lot more for rent,” says Gottesdiener. …

That is largely untrue. Most properties purchased at auction were converted to rentals, so as each foreclosure created a new renter, it also matched it with a new rental unit. There was some lag, which explains the rapid rent increases at the onset of the recession, but the vast majority of new renters paid substantially less to rent than they did to own.

People who lost houses in foreclosure paid a terrible emotional price, and most were wiped out financially as well. And while we may feel sad for what they went through, most emerged in the same neighborhood with far less debt and a cost of housing they could sustain — something we should celebrate.

8 responses to “Delinquent borrowers who lost their homes in foreclosure moved in next door”

While many say government policies aimed at increasing first-time buyer caused the recent housing crisis, however Urban Institute explained why this is not the case, according to its blog by Laurie Goodman.

In fact, new data from the GSEs suggests mortgage purchase originations weren’t at fault at all, but rather, mortgage refinances, according to the blog.

From the blog:

At the height of the boom, mortgages refinances (refis) were more likely to default than mortgages taken out to purchase a home, mostly because many people were treating their homes as ATMs through cash-out refinances. Eighty-four percent of GSE refinances in 2006 and 2007 were cash-out refinances. These refinanced loans suffered from sloppier underwriting, so for any set of observable risk characteristics, these refinance loans defaulted more often than purchase loans.

During the housing crisis, refis were the most likely to fall into default, the blog explains.

This chart from the Urban Institute shows while delinquency rates as a whole did increase from the pre-crisis years, refis performed far worse than purchases.

The first quarter of 2017 saw the strongest quarterly home sales pace in a decade, according to the latest quarterly report from the National Association of Realtors.

This increase in home sales put downward pressure on housing inventory levels and caused home prices growth to accelerate its rate of increase in the first quarter, the report states. In fact, metro home prices now accelerated for three consecutive quarters.

The national median home price increased to $232,100, up 6.9% from the first quarter of 2016. This represents the fastest rate of growth since the second quarter of 2015.

“Prospective buyers poured into the market to start the year, and while their increased presence led to a boost in sales, new listings failed to keep up and hovered around record lows all quarter,” NAR Chief Economist Lawrence Yun said. “Those able to successfully buy most likely had to outbid others, especially for those in the starter-home market, which in turn quickened price growth to the fastest quarterly pace in almost two years.”

Single family home prices increased in 85% of markets as 152 of 178 metropolitan statistical areas showed sales prices gains in the first quarter, the report states. However, in 14 MSAs, home prices decreased year-over-year.

“Several metro areas with the healthiest job gains in recent years continue to see a large upswing in buyer demand but lack the commensurate ramp up in new home construction,” Yun said. “This is why many of these areas, in particular several parts of the South and West, are seeing unhealthy price appreciation that far exceeds incomes.”

The housing market is showing signs of strength as homebuilder confidence grew in May to the second-highest point since the recession, according to the Housing Market Index from National Association of Home Builders and Wells Fargo.

Home builders increased their confidence in the market for newly built single-family homes by two points in May to 70.

This increase follows April’s dip in confidence, where the index fell to 68.

“This report shows that builders’ optimism in the housing market is solidifying, even as they deal with higher building material costs and shortages of lots and labor,” said NAHB Chairman Granger MacDonald.

Derived from a monthly survey that NAHB has been conducting for 30 years, the index gauges builder perceptions of current single-family home sales and sales expectations for the next six months as good, fair or poor.

The survey also asks builders to rate traffic of prospective buyers as high to very high, average or low to very low. Scores for each component are then used to calculate a seasonally adjusted index where any number over 50 indicates most homebuilders view conditions as good rather than poor.

Two of the three HMI components increased in May. The index which measures sales expectations in the next six months increased four points to 79 and the index which looks at current sales conditions increased two points to 76. However, the component measuring buyer traffic dropped one point to 51 in April.

“The HMI measure of future sales conditions reached its highest level since June 2005, a sign of growing consumer confidence in the new home market,” NAHB Chief Economist Robert Dietz said. “Especially as existing home inventory remains tight, we can expect increased demand for new construction moving forward.”

For much of last year, Greg Rubin was looking to buy a bigger house. He has been in the same two-bedroom home for 17 years and hoped to upgrade to a place with a guest room, a home office and a workshop for his guitars, radio-controlled planes and gardening equipment.

This year, Mr. Rubin has a new plan. He stopped looking and embarked on an ambitious renovation project that will begin with a new kitchen and end with a workshop for all the man toys.

“My girlfriend would like to get a larger house, but right now, I’m staying put,” said Mr. Rubin, who lives in Escondido, Calif., and owns a landscaping firm called California’s Own Native Landscape Design.

Mr. Rubin is the face of what appears to be a new normal in the real estate business: Homeowners are moving less, creating a drag on the economy, fewer commissions for real estate brokers and a brutally competitive market for first-time home shoppers who cannot find much for sale and are likely to be disappointed during real estate’s spring selling season.

Teslas in the Trailer Park: A California City Faces Its Housing Squeeze NOV. 13, 2016
For many homeowners, the desire to stay put began out of caution or necessity. Mr. Rubin’s business lost more than half of its revenue in the years after the Great Recession, so until recently, he had no money or desire to upgrade. Millions of other homeowners lost their jobs or were stuck in homes worth less than they owed the bank — two big reasons that the median homeownership tenure rose to about eight and a half years last year, up from about three and a half in 2008, according to data from Moody’s Analytics and First American Financial Corporation. That is the longest tenure since their data began in 2000.

While it’s only a small improvement, California still managed to record an increase in home affordability, according to the latest report from the California Association of Realtors.

However, a look at the different counties across the states shows that geographical location makes a difference, as seen in the chart at the end of the article.

So what percentage of income should be available to get a mortgage? Well, that depends on where the house is located

Overall, the latest Traditional Housing Affordability Index from CAR posted that the percentage of homebuyers who could afford to purchase a median-priced, existing single-family home in California in first-quarter 2017 inched up to 32%. Although this is up from 31% in the fourth quarter of 2016, it is down from 34% in the first quarter a year ago.

CAR noted that this is the 16th consecutive quarter that the index has been below 40% and is near the mid-2008 low level of 29%.

For perspective, California’s housing affordability index hit a peak of 56% in the fourth quarter of 2012.

The HAI measures the percentage of all households that can afford to purchase a median-priced, single-family home in California. CAR also reports affordability indices for regions and select counties within the state.

For the whole state, homebuyers needed to earn a minimum annual income of $102,050 to responsibly qualify for the purchase of a $496,620 statewide median-priced, existing single-family home in the first quarter of 2017. The monthly payment, including taxes and insurance on a 30-year, fixed-rate loan, would be $2,550, assuming a 20% down payment and an effective composite interest rate of 4.36%.

The minimum income needed to qualify for a loan on the median-priced home is calculated using the rule that the monthly payment for principal, interest, taxes and insurance can be no more than 30% of a household’s income.

California SFR’s have been hovering in the 30-34 range on the HAI for four years now, when the rapid price gains of 2012-2013 turned into more modest single-digit price gains. A combination of repeatedly testing the interest rate lows, and more people finding work, is keeping affordability steady.

For comparison, the current level of affordability matches the 2000-2001 period prior to the housing bubble taking hold. (Historical data can be downloaded from CAR’s website.)